The Reverse Charge Mechanism in Tally is one of the most important yet commonly misunderstood GST concepts for businesses in India. Under normal GST rules, the supplier collects tax and pays it to the government. However, under the Reverse Charge Mechanism (RCM), the responsibility of paying GST shifts from the supplier to the recipient of goods or services.
Understanding Reverse Charge Mechanism in Tally is critical for accurate GST compliance, correct ledger setup, proper tax payment, and seamless Input Tax Credit (ITC) reporting. Incorrect handling of RCM entries in Tally often results in GST notices, ITC mismatches, and audit issues.
This detailed article explains the Reverse Charge Mechanism in Tally step by step, covering legal provisions, applicability, accounting treatment, GST payment, ITC eligibility, and common mistakes—written in simple language and practical format.
What Is Reverse Charge Mechanism (RCM)?
Reverse Charge Mechanism is a GST system where:
- GST is paid by the recipient
- Supplier does not charge GST
- Tax liability arises on the buyer
RCM ensures tax collection even when suppliers are unregistered or notified categories are involved.
Legal Meaning of Reverse Charge Mechanism in GST
Under GST law, RCM applies in two major situations:
- Notified goods or services
- Purchases from unregistered suppliers (URD)
In both cases, the recipient becomes liable to pay GST directly to the government.
Why Reverse Charge Mechanism Is Important in Tally
Businesses using Tally Prime must configure RCM properly to:
- Calculate GST liability correctly
- Pay GST through GSTR-3B
- Claim eligible ITC
- Maintain audit-ready records
Incorrect RCM configuration can distort GST returns and financial statements.
Types of Reverse Charge Mechanism
1. Reverse Charge on Notified Services
Certain services are always covered under RCM, such as:
- Legal services by advocate
- GTA services
- Sponsorship services
- Director’s remuneration (specific cases)
2. Reverse Charge on Unregistered Dealer (URD)
When a registered business purchases goods or services from an unregistered supplier, RCM may apply subject to GST provisions.
Key Features of Reverse Charge Mechanism
- Supplier does not collect GST
- GST is paid in cash, not via ITC
- ITC can be claimed after payment
- Separate accounting treatment required
- RCM shows in GSTR-3B but not in GSTR-1
Reverse Charge Mechanism in Tally: Configuration Overview
Before accounting entries, RCM must be enabled in Tally.
Basic Requirements
- GST enabled company
- Correct GST registration type
- Separate ledgers for RCM tax
Ledger Creation for Reverse Charge Mechanism in Tally
Expense Ledger Under RCM
- Nature: Expense
- GST applicability: Applicable
- Set “Is reverse charge applicable?” to Yes
Supplier Ledger
- Registration type: Unregistered or Registered (as applicable)
- GST applicability: Not applicable or exempt
RCM Tax Ledgers
Separate ledgers are required for:
- CGST under RCM
- SGST under RCM
- IGST under RCM
Accounting Treatment of Reverse Charge Mechanism in Tally
Step 1: Purchase Entry Without GST
- Record purchase value only
- No GST charged by supplier
Step 2: Self-GST Liability Creation
- GST calculated internally by Tally
- Tax liability posted to RCM tax ledgers
Step 3: GST Payment
- GST paid through challan
- Payment made in cash
Step 4: ITC Claim
- ITC claimed after tax payment
- Adjusted against future GST liability
Reverse Charge Mechanism Accounting Flow
| Stage | Accounting Impact |
|---|---|
| Purchase | Expense booked |
| GST Liability | RCM tax payable |
| Tax Payment | Cash outflow |
| ITC Claim | Input credit created |
GST Payment Under Reverse Charge Mechanism
GST under RCM:
- Cannot be paid using ITC
- Must be paid via cash ledger
- Reflects avoidable interest if delayed
RCM tax is paid while filing GSTR-3B.
Input Tax Credit Under Reverse Charge Mechanism
ITC under RCM is:
- Available only after GST payment
- Claimed in same or subsequent month
- Allowed if expense used for business
In Tally, ITC appears automatically once RCM tax payment is recorded.
Reporting of Reverse Charge Mechanism in GST Returns
GSTR-3B
- RCM liability shown separately
- Tax paid in cash
- ITC claimed under eligible credit
GSTR-1
- RCM purchases not reported
- No outward supply involved
Common Mistakes in Reverse Charge Mechanism in Tally
- Forgetting to enable RCM in expense ledger
- Paying RCM tax using ITC
- Claiming ITC before tax payment
- Incorrect supplier registration type
- Missing RCM reporting in GSTR-3B
Practical Example of Reverse Charge Mechanism in Tally
Assume:
- Legal service received: ₹50,000
- GST rate: 18%
RCM Calculation
- GST payable: ₹9,000
- CGST: ₹4,500
- SGST: ₹4,500
Accounting Impact
- Expense: ₹50,000
- GST paid in cash: ₹9,000
- ITC available: ₹9,000
Advantages of Reverse Charge Mechanism
- Improves tax compliance
- Expands GST coverage
- Reduces tax evasion
- Transparent tax collection
Challenges of Reverse Charge Mechanism
- Increased compliance burden
- Cash flow impact
- Complex accounting entries
- Higher risk of errors
Best Practices for Handling RCM in Tally
- Maintain separate RCM ledgers
- Reconcile monthly RCM liability
- Track ITC eligibility
- Review expense nature carefully
- Audit RCM transactions quarterly
FAQ: Reverse Charge Mechanism in Tally
1. What is Reverse Charge Mechanism in Tally?
It is a GST process where the buyer pays GST instead of the supplier, and Tally records this liability internally.
2. Is GST paid under RCM eligible for ITC?
Yes, ITC can be claimed after paying GST in cash.
3. Can RCM tax be paid using ITC?
No, RCM tax must be paid through cash only.
4. Does RCM appear in GSTR-1?
No, RCM transactions are not reported in GSTR-1.
5. Which return reflects RCM liability?
RCM liability is reported in GSTR-3B.
6. Is RCM applicable to all unregistered purchases?
Only notified categories are covered under RCM.
7. Is RCM mandatory configuration in Tally?
Yes, incorrect configuration leads to GST mismatch and notices.
Conclusion
The Reverse Charge Mechanism in Tally plays a crucial role in GST compliance for Indian businesses. While it increases responsibility on the buyer, proper understanding and accurate accounting ensure seamless compliance, correct ITC claims, and audit-ready records. Businesses that configure RCM correctly in Tally avoid penalties, interest, and GST disputes.
Disclaimer
This article is for educational and informational purposes only. GST laws and Reverse Charge provisions are subject to amendments. Readers should verify current applicability and consult a qualified professional before implementing accounting or compliance decisions.